The large cap space looks slightly overvalued while the small cap and mid cap stocks are fairly valued at this point. And with a broad-based economic recovery on cards in a low interest rate environment, the small cap segment can outperform the large cap segment, says Ankit Agarwal, Fund Manager - Equity at UTI MF.
Ankit believes that typically the cost of funding is higher for small cap companies as against large cap companies. Therefore, a low interest rate coupled with broad-based economic recovery will bring a sizable earning expansion in small cap companies.
Speaking at a webinar organised by Cafemutual and UTI MF, Ankit further explained that companies have used this pandemic to cut their cost on many fronts and a large part of it will remain unchanged going forward. Therefore, the operating profit of companies will improve, even as revenues come back to the level witnessed last year. Consequently, the bottom-line will be higher as companies are setting themselves for a much higher earning expansion.
Valuations
On valuations, Ankit said that if one looks at metrics like price to book ratio, the small cap segment is close to fair valuation. On dividend to yield metric, the small caps are slightly in a favourable position. “So, if I combine these two, small caps are at a reasonable space as far as the valuation is considered,” Ankit said.
Sectoral bet
On sectoral allocation, Ankit is upbeat on chemicals, agri-focussed segments, consumer discretionary, construction and select industrial space. However, he clarified that the fund house would follow bottom-up approach.
UTI Small Cap Fund Investment strategy and risk mitigation
Ankit said that UTI Small Cap Fund’s investment strategy is to pick companies that have scalable business models, are run by seasoned managements and generate high return on invested capital. Since the fund would pursue a pure bottom-up approach for stock picking, it would be agnostic to sectors.
At the same time, the fund will use a robust risk assessment framework that enables the fund to mitigate the underlying risks. Here is how it will work:
Research framework. In-house proprietary research process and methodology “ScoreAlpha” helps in consistently identifying good stocks and avoiding poor stocks. The fund would also have the blend of both growth and value investment style with a tilt towards growth.
Diversified portfolio: Maintain judicious portfolio diversification across stocks and sectors. The fund would have 60-70 stocks in the portfolio across sectors.
Position sizing: Based on the relative conviction, market depth and overall stock level risks, the fund would have a cap of 5% allocation at stock level.
Investment suitability
Given that the fund will start in a post covid world, it can tap into the new realities and new possibilities with ease. Moreover, there are no size constraints as well, which can be crucial in tactical allocation. While bigger funds in the category often have restrictions on inflows, UTI Small Cap Fund being a new offer can fully benefit from exploring the opportunities without much limitations, Ankit said.
Ankit added that SIP will be an appropriate method to invest in this fund. For lump sum, investors should anchor it to their asset allocation rather than being too fixated on market levels.
To get the best out of this fund, investors should come with a minimum investment horizon of 5 years. Conservative investors can allocate 4-5% of their portfolio to small cap funds while aggressive investors can take more than 8%, said Ankit.
